How To Manage Your Business Finances Effectively
Did you know that more than 80% of small businesses fail because of cash flow issues? If you don’t want your business to be part of that statistic, it’s time to manage your business finances effectively.
Running a business is no easy feat after ensuring you provide your clients with the goods and services you offer. You still have to cater to inventories, marketing, administrative work, cash flow management, etc. No one goes into business to fail or not make money, even if you are doing it as a hobby or for fun. Everyone wants to see their efforts shown at the end of the month or year as profits.
Properly managing and organizing your business finances will contribute to the success of the business. It will ensure you have good cash flow and that you are hitting your profit goals. Here are a few tips to help you manage your small business finances.
Manage your cash flow
Cash flow means the money that’s coming in from the sale of your goods and services and the money going out in expenses. Cash flow is affected by different things, and one of them is pricing. The price you set for your goods matters a lot and will determine the amount of cash flow you have. It can be tempting for a new business owner to price items very low to attract customers, but that may put a lot of stress on your expenses and the cost of running the business, affecting your cash flow.
On the other hand, setting your prices too high will not attract any customers, and therefore no money will be coming into the business. You need to ensure your pricing is set just right to give you a competitive edge in the market.
Your billing strategy is also another factor that may affect your cash flow. It is essential to have an effective billing system to ensure that money is actually flowing into your business. If you have many unpaid invoices, this can affect your cash flow, and you may lack the liquidity to stay afloat. Encourage your clients/customers to pay their invoices on time. You can do this by offering discounts for those who pay on time.
Lastly, to control how much money you have flowing out and in, you must create a budget plan. A budget helps you keep track of your expenses and avoid having more cash flowing out than what is coming in. A budget will also help you set a limit for expenses and a revenue line for money coming in. Doing this will help you have enough cash to run the business.
Open a separate account for your business.
Once your business starts making profits, it is essential to separate your personal finances from your business finances. This helps you keep everything organized, and you can keep track of your business income and business expenses effectively.
It’s understandable if, when you started, you were using your personal account for the business because most people start a business with their savings. However, when you settle, and the company catches up, you should open a separate account for your business.
Having a separate account helps you keep track of transactions and helps you know exactly how much you are making in the business. It also eases up bookkeeping, especially during tax season when you have to go through thousands of receipts to file your taxes.
While your bank balance may not show the complete picture of your cash flow, having a separate account for your business helps you know and react to your current cash situation. If you are running low, you can inject some more cash either by following up on invoices, using credit though this will depend on the issuing banks. It is easier to demonstrate your financial situation if you manage a separate business account. If you notice an overflow of cash in your account, you can either invest it elsewhere, save it or invest it back in the business.
Take insurance for your business.
Running a business takes a risk, and for this, you must protect your business, whether it’s taking insurance or registering it under an LLC or an S-Corp. Establishing your business under an LLC or S-Corp will allow you to separate your business assets from your personal assets.
Insurance will pay for any unforeseeable risks in the future, and if anything happens, you can always get back to business. On the other hand, an LLC or S-Corp will protect your personal assets from any legal issues regarding the business.
Ensure that all your licenses and certifications are updated, and you can always do this by setting reminders. Protecting your business this way is the best way to ensure no financial issues from your business may seep into your personal finances and vice versa.
Set up numerous payment methods
Advancements in technology have changed how consumers can pay for products and services from your business. Setting up different payment options, including the traditional ones and the ones brought by new technology, widens your customer base and may increase cash flow. You can have contactless payment options, credit cards, mobile payments, debit cards, electronic transfers, etc.
Customers choose different payment options because of the various benefits they offer them. For example, most people prefer Apple Pay because it is faster and secure. If you have long queues at your store, customers using mobile payment options such as Apple Pay will quickly tap their devices, pay, and keep the line moving.
Accepting payment options and displaying flexibility at your store shows your customers that you are a modern and adaptable business. It gives your customer the convenience to pay with any payment method they prefer. With this, you will increase engagement, make more sales, which increase your cash flow.
There you have it. Running a successful business requires excellent management and organization skills. If you take some of the tips given above, you can avoid your business failing and stay in the 20% group of businesses that make it.